A bomb jack is seen at dawn near Bakersfield, California, on October 14, 2014.
Lucy Nicholson | Reuters
Oil prices rose more than 7% on Thursday as traders appear unconvinced that government reserves can offset the huge supply shock caused by the war in the Middle East.
West Texas Intermediate rose 7.5% to $93.8 a barrel, while global benchmark Brent was trading about 7.74% higher at $99.1, even after the International Energy Agency announced its largest emergency release of crude reserves in history.
The IEA said on Wednesday that its 32 member countries would release 400 million barrels of oil from emergency reserves, marking the largest coordinated reduction since the agency was created after the 1973 oil embargo.
The United States announced it would release 172 million barrels from its Strategic Petroleum Reserve, and Energy Secretary Chris Wright said shipments could begin next week and would take about 120 days to complete.
The IEA decision also signals how serious the risk of oil shortages is and suggests that the IEA does not believe it is unlikely that the war will end soon.
The oil market has shrugged off those announcements as prices continue to rise, highlighting traders’ skepticism that the measures will help close what analysts said could be the supply gap if flows through the Strait of Hormuz remain disrupted.
“Prices right now are still in panic mode. There is a lot of emotion, fear and uncertainty built into the price we see,” said Pavel Molchanov, senior investment strategist at Raymond James.
The IEA’s record release of strategic stocks will add some much-needed volumes to the market, although it will only close up to a quarter of the 20 million barrels per day supply gap posed by the closure of the Strait of Hormuz, said Saul Kavonic, energy analyst at MST Marquee.
“But the IEA decision also signals how acute the risk of oil shortages is, suggesting that the IEA does not believe the war will end soon, and that current stock draws will have to be replaced later, foreshadowing higher prices even after the war ends,” he told CNBC.
About a fifth of the world’s oil supply passes through the Strait of Hormuz, which connects the Persian Gulf to global markets.
Timelines and logistics remain unclear
A key reason markets remain uneasy is uncertainty over how quickly barrels will hit the market, industry veterans said.
While the IEA announcement marked an unprecedented intervention, the agency did not provide details on how quickly countries will release their reserves or how the oil will be distributed.
“That’s one of the main questions: How long will it take for the 400 million barrels to physically reach the market?” Molchanov said.
Oil prices since the beginning of the year
“Four hundred million is a big number… but this is the biggest oil supply disruption since at least the 1970s, so we need a lot of oil, and we need it quickly,” he said.
Each IEA member country maintains separate strategic reserves, meaning technical and logistical limitations could slow the flow of barrels.
Molchanov estimated it could be 60 to 90 days before oil hits the market significantly, longer than traders expect immediate relief.
